99 Cents Only cleaning up inventory accounting

For the second time in the past six years, 99 Cents Only said it was unable to file its annual report within the timeframe specified by the Securities and Exchange Commission.

The company’s annual report on form 10-K for its fiscal year ended March 30 was due at the SEC no later than June 28. However, because of a range of inventory valuation issues identified by auditors and a new CFO, the company said it was unable to file the report without unreasonable effort or expense. The company did not indicate when it planned to file the report other than as soon as practicable.

Previously, 99 Cents Only had difficulty with the timely filing of its financial reports in 2006 and 2007. The company’s annual report for the fiscal year ended March 31, 2006 wasn’t filed until early 2007 which set off a chain reaction that caused the company to also file late quarterly reports for the second half of the fiscal year ended March 31, 2007 and the full fiscal year.

For the recently ended fiscal year, the company did shed light on its anticipated fourth quarter results. Sales were expected to increase nearly 10% to $435 million and same store sales were expected to increase 4%. About half of the comp increase was related to a shift in the timing of the Easter holiday. Full year sales were expected to increase 9% to $1.7 billion and same store sales were expected to increase 4%.

In addition, the company said it believes sales per stores increased to $5.3 million from $5.2 million and sales per sq. ft. increased to $321 from $309.

At the end of its fiscal year, 99 Cents Only operated 316 stores, consisting of 232 stores in California, 39 in Texas, 29 in Arizona and 16 in Nevada.

The most recent inventory and accounting issues follow a going private transaction completed in early 2012. A group led by Ares Management LLC, Canada Pension Plan Investment Board and the members of management, including CEO Eric Schiffer and his father-in-law and founder Howard Gold, bought the company for $22 a share.

However, earlier this year Schiffer and Gold parted ways with the company and seasoned retail executives Richard Anicetti and Michael Fung were tapped to fill the roles of interim CEO and interim chief administrative officer, respectively.

At the time of the change, Anicetti has served eight months on the company’s board. He previously held the position of president and CEO of Food Lion. Fung joined the company after previously serving as CFO for Walmart’s U.S. stores division.

To avoid future problems, 99 Cents Only is in the process of upgrading its systems for accounting for merchandise inventories, including implementation of an SAP system that will for the first time track inventory at each retail store on a perpetual basis by stock keeping unit. The SAP implementation process will begin in fiscal 2014, with all stores expected to be included by the end of fiscal 2015.

It was preparation for implementation of the SAP system that cause the company to uncover it had been overstating the value of inventories by as much as $20 million. The company is currently reviewing the nature of the overstatement of the inventory balance and its effect on the consolidated financial statements for current and prior periods, including whether any adjustments to prior periods that may be necessary are material to those periods.

In another development related to the changeover in management, beginning in the fourth quarter of fiscal 2013 the company also changed how it estimates its excess and obsolete inventory so that reserves include items that are at least 12 months old and are not expected to sell above cost within 12 months. As a result of this change in estimate, the company expects to record a non-recurring charge to cost of sales and corresponding reduction in inventory of approximately $10 million in the fourth quarter of fiscal 2013.

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